Homeowners inject £8BN into the property market in just three months as mortgage repayments outstrip new borrowing

Households injected £8billion of equity into their homes in the three months to September, the 18th consecutive quarter in which the value of mortgages shrank as a proportion of housing wealth.

The overall equity in the housing market has been increasing since the start of the financial crisis as homeowners steadily pay off loans while fewer people remortgage or withdraw money from homes through secured loans.

The Home Equity Withdrawal (HEW) figures from the Bank of England today show that for almost a decade, from September 1998 until March 2008, equity in housing stock fell consistently as borrowing rose. However from this date until the present this trend has been reversed, with as much as £9.4billion in equity withdrawn between April and June this year and £8billion between June and September.

Building up: British homeowners added £8billion over all to the property stock in the three months to September this year

It is thought the reversal is largely due to falling levels of activity in the property market, with first-time buyers unable to get on to the property ladder and homeowners putting off moving home amid uncertainty in the housing and jobs markets and the economy in general.

Equity in housing tends to decline when there is a high level of activity in the market. In each property chain, where a series of people sell one property to buy another, overall equity drops, so the higher the number of chains the more equity is removed from the housing stock over all.

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It works like this. A property chain tends to see a first-time buyer inject a small amount of equity into the market through a down payment on a property.

Every other homeowner in the chain tends to make only a very small change in the net equity they put into the property market – they simply transfer the equity they have from one property to another. Then finally at the end of the chain tends to be someone who is selling their home but is not buying another one – so they are removing equity from the market. This is often in the case of inherited property or someone migrating.

Graph showing the withdrawals and injections of equity into housing from 1994 to present

The net balance of equity in the whole chain tends to be negative as the amount injected into the market by the first-time buyer is smaller than the amount removed by the seller at the end of the chain.

As housing market transactions have fallen to around half their pre-crisis levels, so has overall equity risen every quarter. While the housing market has shown some signs of life in recent months, lenders have reported that volumes remain low, with figures from the Council of Mortgage Lenders showing remortgage numbers down by almost 14 per cent year-on-year in October.

Graph showing the relationship between housing equity withdrawal and the level of housing market transaction activity from 1978 to present

The financial crisis saw a sharp tightening in credit availability, a fall in house prices and a drop in housing market transactions to around half of their pre-crisis levels.

This has meant a fall in the number of first-time buyers as the typical size of deposit needed has risen dramatically. As first-time buyers start housing chains, as their numbers have dwindled so have the number of chains.

As house prices have fallen to around 13 per cent below their 2007 level, the value of homeowners’ housing equity has also dropped.

Homeowners are also resisting taking equity from their homes through secured loans because credit is so tight.

‘The further substantial net injection of housing equity in the third quarter of 2012 suggests that there is an ongoing strong desire ... of many people to improve their personal financial balance sheets given high debt levels and still serious concerns over the economic situation,’ said Howard Archer, chief UK economist at IHS Global Insight.